What does the Geithner plan mean?

My piece in today’s Fin is about the Geithner plan to bail out US banks. I’ll post the whole thing tomorrow (given that the Fin is pay-only, I wait until today’s issue is off the stands), but there’s one point I want to stress.

Most of the debate about alternative bailout plans has been framed around the equivalent pair of questions: liquidity crisis or solvency crisis? and book value or mark-to-market? The Geithner plan assumes that the true long-term value of ‘toxic’ [1] asset-based securities greatly exceeds their current market value, and that the banks are therefore solvent but illiquid. Critics like Krugman don’t buy this.

But the really big question, it seems to me, is what kind of financial system will emerge from the current crisis. Geithner, Summers and Bernanke clearly envisage something very like the pre-2008 system, with a few less players (all the better for Goldman Sachs!) and some tighter regulation to prevent unfortunate occurrences like those of the last year. The advocates of nationalisation implicitly accept that something very different is going to be needed; not permanent public ownership, but a much smaller, more conservative and less profitable financial sector, providing necessary services in the manner of other utility and infrastructure businesses. An obvious dividing point is financial innovation: advocates of Geithner style bailouts are much concerned to avoid discouraging financial innovation, while the critics see uncontrolled innovation as a large part of the problem.

fn1. A side issue I’ve been meaning to raise for a while concerns the salience of “toxics” in US culture generally. As an example, food safety seems to be regarded as a major environmental issue in the US, while in Australia it seems to me to be seen as a minor local government issue, with the archetypal instance being dirty restaurant kitchens suitable for hidden camera current affairs exposes. But it’s hard to tell if my perceptions on this are accurate.

On the side issue of food safety, it’s an issue because of lack of regulation, see eg Revere at Effect Measure and particularly Annals of peanut butter. I think the situation in the beef industry hasn’t changed much since 1992, when Jeremy Rifkin wrote “Beyond beef”. Chapter 32 ‘Warming up the planet”, on the beef industry’s contribution to AGW, is pretty depressing – we knew it all in 1992!

“The Geithner plan assumes that the true long-term value of ‘toxic’ [1] asset-based securities greatly exceeds their current market value, and that the banks are therefore solvent but illiquid.
Critics like Krugman don’t buy this.

I dont buy it either but the large financial firms are hoping a lot of silly individuals will buy the toxic rubbish (just talk them up…long term values higher bla bla bla…then pray for a few sales). The rubbish was not only the progeny of uncontrolled innovation; it turned the rating industry toxic as well.

John, on the food safety issue: can’t say anything about the comparative regulatory frameworks but have some experience of the practicalities. In the 3-odd years I was in America, I suffered from food poisoning twice and each member of my family was similarly affected. So that’s around 6 incidents in 3 years, 6 more than we’ve experienced in many more years living in Oz. Plenty of US friends had similar experiences. After a long-term (one week) electricity blackout, it was common discussion amongst locals to stay away from restaurants. On the whole, people seemed quite blase about the matter, that is, expected at some stage to get ill from eating out. In brief, my experience (and that’s all it is) was that food safety was a pretty low priority in the US.

The difference in food safety between the USA and Australia seems partly related to the concentration of food industries. Two instances of food contamination that I’m passingly familiar with (the recent peanut butter contamination and the spinach contamination of late 2006) both stemmed from single producers but they resulted in poisonings and recalls that were country-wide. It seems that production is less intensive and somewhat more localised here in Australia.

“something very different is going to be needed… a much smaller, more conservative and less profitable financial sector, providing necessary services in the manner of other utility and infrastructure businesses”.
This is starting to sound like Freddie and Fannie. It was their policy of securitizing mortgages that originally created the moral hazard that led to the GFC. This is obviously an oversimplification but Fannie Mae was started by FDR in 1938 as part of the New Deal to make mortgages available to low income families.

Alice is correct in noting that Freddie and Fannie were privatised but there was an implied government guarantee to their debts that enabled them to undercut their competitors and dominate the US market.

Alice, #3, “financial firms are hoping a lot of silly individuals will buy the toxic rubbish”: this is not correct, I suspect these silly individuals will make lost of money out of this.

These may be termed ‘toxic assets’ (which I find rather emotional) but the reality is that the current prices reflect poor credit (which is the point emphasised by Krugman) but also a discount for lack of liquidity (mainly due to psychological risk aversion and career risk). In other words, current market prices are by definition lower than what they would have been if there were worked out based on the current projecions of future losses only. Krugman’s view implies that current loss projection will continue to be revised downward: I see no clear evidence for this.

Geithner’s plan helps to address the liquidity problem and it is a step in the right direction.

Most of the debate about alternative bailout plans has been framed around the equivalent pair of questions: liquidity crisis or solvency crisis? and book value or mark-to-market?

Something of a false dichotomy. Obviously the GFC started as a liquidity crisis – amongst mostly minority sub-prime owner-occupiers or proto-slum lords lured into massive NINJNA loans by teaser rates, only to be caught cash-strapped when the usurers turned up the screws.

Equally obviously it has ended up as a solvency crisis as massive amounts of over-supplied and under-serviced housing assets have been dumped onto the market at fire-sale prices. Causing MBS’s to head south into toxic territory.

The biggest threat to the economy is initially liquidity crisis as high leveraged borrowers are credit squeezed (margin-called) and then forced into foreclosures and bankruptcy causing asset fire sales. Leading to high-level insolvency crisis as financial institutions go belly up needing bail-outs.

In any case, elementary finance theory posits that solvency is just frozen liquidy. A cash-flow crisis should not force en-masse asset-sales, providing interest rates are low enough to allow holding costs to be met. So the fault is systemic.

The Geithner plan assumes that the true long-term value of ‘toxic’ [1] asset-based securities greatly exceeds their current market value, and that the banks are therefore solvent but illiquid.

Its wishful thinking for US policy makers to dream about reviving a housing price horse already debt-flogged to death. According to one report the US housing market has lost $6T since 2005. Although this figure overestimates the realisable losses since only a fraction of US properties changed hands during the three years of the bubble.

Alot of people went into consumer debt or became spendthrift on the “wealth effect” assumption that housing appreciation was permanent. Those house-price inflated borrowings from 2003-6 – figure that probably exceeds $1T – are now gone, finito, caput.

All this bust has done has reveal that the US’s housing wealth has been vastly over-estimated by asset markets. Housing accommodation wealth reflects the underlying human capital of the housing accommodated.

And this is no where near as high as expected by the quants on Wall Street, or Mainstream pundits for that matter. The underlying value of mostly minority-owned or -rented accommodation in the Sand States is just not that high. Thats because their earning potential is not that high.

In order to re-solve the value slump the US Treasury would have to, in effect, buy up these busted assets at boom-time prices. Anyone want to pay another ~$300K (22/12/05) for this 825ft mansion, straight outta Compton? Now selling for the steal price of ~150K?

It means that Larry Summers has won the policy struggle. He is opposed to financial nationalisation and regulation on principle. The principle being that Masters of the Universe should have nothing standing in their way to inhibit kleptocracy.

Explicit nationalization of financial companies has little support among key Obama officials, sources said. Treasury Secretary Timothy F. Geithner and top White House economic adviser Lawrence Summers think governments make poor bank managers and cannot efficiently manage a vast number of institutions, according to some of their associates.

Possibly. But private companies left to their own devices are not exactly coming up trumps.

Arianna has a pretty neat summary of Summers contribution to the financialisation fiasco.

This is the guy who helped set up Andrei Schleifer as the go-to “suitcase economist” for the Great Heist Privatisation of Russian industrial and mineral asstes c-1994. Connected guys did alright out this deal. But how’s it working out for Russian people?

This is the guy who administered the repeal of the Glass-Steagall Act. Giving investment banks free run at the assets of the property market. It worked out well for Goldman Sachs. But how’s it working out for the American people?

Proving that intellectual failure is no barrier to political success so long as the right people are getting a juicy cut.

I do not understand Obama’s rationale for following this advice. I doubt that he has much sympathy for Summers underlying policy orientation. Which means that Obama is probably doing this for political reasons.

I doubt the general public would have much objection to a nationalisation program. Which implies special interests are probably staying Obama’s hand.

Jack, Summers’s flaws as a practical economists granted. However, with regard to the nationalisation option, what is largely disregarded by academic economits a-la Krugman is that while it may well work in theory, it is not a viable alternative in practice. We are firmly in the realm of political economy: nationalisation is an incredibly messy process legally and even less palatable politically.
The legal process for nationalisation is likely to take months: there are not only corporate law issues to consider but also how it would work from an international treaty point of view. Say, NAFTA apparently has provisions contratining nationalisation where investments are in another state: all of the relevant banks are global. Politically, of course we are facing a hysterical Congress. It also still does not offer much by way of price discovery.

But Wattle# Fannie was in private management hands (and the securitisation process) orchestrated by private management. I thought also that Fannie Mae wasnt government guaranteed after privatisation, rather they had to be managed with certain objectives in mind eg subject to a government charter – correct me if I am wrong on this.

The Russian privatisation process may have been corrupt (including Shleifer jimself apparently) and did produce a small number of oligarchs in the 1990′s. However, we need to remain the following points:
- in 1994, politically there was a serious and clear threat of a return to communism. Quick privatisation of major resources was one of the way of ensuring this becomes impossible. Yelsin’s 1996 re-election was equally corrupt but in the final analysis essential.
- it eventually did set in place the Putin system of stable and growing economy. The Russian people did not so badly out of it, at least at this point. The obvious weak points of Russian economy (the 1998 default, the over-reliance on oil revenues, high levels of corruption) had little to do with Summers and privatisation and more to do with the subsequent Putin-inspired focues on natural resources.
- The great majority of current ‘industry captains’ in fact acquired their wealth during the 2000′s as the Sovier legacy continued to be looted, this time by a new group of individuals.

In other words, there were good economic and more importantly political economy reasons for Shleifer’s and Summers’s advice. Equally, Summers and Geither are recognising political realities now: they do seem to me to be closer to being realistic than Krugman et al.

Ilya#3 considering the original loans in the CDOs were likely to have been based on US house prices susbstantially higher than they are now – why would they not be toxic assets still? It could take decades, given the default rate, where there is no return at all on some of these assets and they are represent in fact only an outgoing – even gven you end up owning the house rather than the income stream – that is a cost not a return – in which case they should be paying people to buy them (and still more reset dates to come???).

Perhaps as an Austrian standing above all this I’d make the following observations. Firstly Keynesians come in 2 broadly different types, Mechanistic and Social. MKs simply believe in greasing the economic wheels and ironing out the bumps while SKs almost inevitably incorporate those simpler values, but also want to impose their own order of things for some perceived social need. Then there’s the rentier class who in the absence of any juicy rent pickings, side with MKs to keep the SKs off their backs and to some extent we austrians. Basically we minority Austrians reckon you can’t trust any of them for the simple fact of human frailty, something we implicitly understand. That’s why we scoff at the suggestion you can trust MKs, let alone SKs with the printing press and opt for a level playing field, exchange based commodity backed currency like gold.

Now when the inevitable happens with massive credit expansion and consequent bust it’s somewhat bemusing to watch all the finger pointing, largely between SKs and the rentier classes. It’s always the money supply stoopids, although each episode has its particular historical flavour. Western demographics coupled with Asian mechanistic Keynesianism re exchange rates would disguise this one for so long and so deeply, but as always the credit bubble creates happy bedfellows as they gorge themselves on funny money, bearing in mind that salutary Austrian lesson that first cab off the rank gets to gorge the most and hence those financial returns. Returns which SKs happily gorged on with their bloated tax receipts while MKs were patting themselves on the back profusely. Come the bust and MKs must go on but all of a sudden the SKs and rentiers are at each others throats. that’s what’s so infuriating to SKs now, that their mechanistic side must necessarily go on feeding the rentier class too as they bailout the system. What Austrians see is simply the end result of past human frailty. You don’t have to regulate the rentiers into seeing the folly of all that alphabet soup anymore, but that won’t stop SKs from baying at the moon for more regs. Regs that they didn’t want to see when a Markopolos gave them an open and shut case as to what was going on. It’s always the same with funny money and the good times a rolling, but aren’t the SKs spitting chips at the rentiers now for being exposed by the MKs as the same snouts in the trough as always. Real ‘bailout buddies’ now aren’t they?

Alice #23, that is correct, the original market prices were based on house prices at the time. However, the banks have already taken massive writedowns to bring the carrying values to the current expectation of future house prices and default rates. They have also had to take a writedown due mark-to-market accounting: here the lack of liqudity I refer to is critical. Buy-to-hold players have not had to take the losses.

In any event, the securities continue to provide cash flow: it may be a % of what was expected originally but it is simply not true to say ‘there is no return’ on RMBS’s or even the less toxic CDO’s. What there is not is a reasonable return relative to the initial outlay: but of course the outlay of the PPIP investors will be much lower and their upside is massive.

There are credible forecast of future house price paths. Presumably, this is what the bidders will be basing their own valuations on. What is important is that mark-to-market and liquidity concerns no longer bring the vals down.

a) current expectation of future house prices leaves the door open to “optimistic” expectations, given the looming rise in unemployment, hence ability to pay, hence future demand and house prices. Recovery could take longer than expected.

b) Im wondering if people wouldnt want a “reasonable return” on their outlay now considering the sum invested rather an upside, the commencement of which is unknown and “massive” under these circumstances seems also optimistic. “Massive” may not materialise.

c) What about the case of oversupply as yet more defaults occur and yet more CDOs turn bad (and more financial institutions turn them over to a toxic bank). These loans have reset dates and I understand the reset dates are not yet completed. Can anyone tell me at what point are the subprime loans expected to fully turn on their “worst” interest rate scenarios…until then the defaults cant be considered to be over ?.

Sean#21 – we have fully played out this discussion already so I wont be going down this track again. It wasnt Fannie or Freddie that engaged or participtaed in the massive selling of subprime loans between 2004 and 2007 (although it appears they may have refinanced distressed borrowers from the subprime loans after 2007). You dont agree, despite the considerable evidence that was posted in another thread. So we will have to agree to disagree.

You get the impression those traders were set up by there naive and/or backstabbing (defacto government representatives) bosses to take the fall so the government and AIG bosses could point the finger at someone other than themselves for the financial disaster.

Despite the article apparent genuine appeal, I don’t think it will change the anti-banker propaganda based wonderland witch hunt currently being waged by the government and its stooges.

The whole AIG fiasco stinks of politcal will and corporate egos. It should have been liquidated along with its toxic assets in the first place. It would have been an especially unpleasant experience for those in the corridors of power, but instead the debt has been left with the American people for at least the next few generations.

Alice, the upside will be massive: these guys will be putting $6 with the rest supplied by the Treasury and the FDIC. We are firmly in double-digit return territory.

Provided that the economy does not tank completely of course, here I concur. My feel is that we are scraping the bottom and should see some signs of improvement (not recovery per se but improvement nonetheless) next quarter. This is pure speculation based on a hunch I am picking up from the zeitgeist and not much better than that. Although see Calculated Risk for some tentatively good news.

Now, in terms of over-supply and more CDO’s getting worse, it is interesting. Moody’s for example have gone through another round of downgrades in the past two months and are communicating that they think the ratings have now stabilised, at least based on their forecasts. Maybe, maybe not: again depends on the economy.

This thread is going to turn into a classic optimist vs. pessimist thing, isn’t it…

I don’t disagree. But they were promised bonuses and in good faith performed there jobs only to be abandoned by their spineless bosses, and were hung out to dry by the anti-banker lobby. A little unfair I think.

It would have been better to have liquidated AIG in the first place. This would have prevented further misuse of public funds.

Cringeley highlights a problem with perfect knowledge: “Here’s how it works in practice. The alpha trader senses, guesses, or maybe just wishes for weakness on the part of AIG and its particular CDS issue, so he shorts that issue. The signal from that short (it is big and aggressive, having as much force as possible) is detected by 500 trading workstations running genetic algorithms – workstations that are not regulated in any sense whatsoever. AIG’s CDS begins to glow in front of 500 junior traders. Some programs kick-in automatically and sell, too. The CDS glows even brighter and begins to throb as if its heart was beating. Traders pile-on like piranhas, sensing opportunity, smelling blood, until the CDS is oversold to nothing, until it is dead.”

There was a cost for the “good economic and more importantly political economy reasons for Shleifer’s and Summers’s advice” with repect to the transformation of the Russian economy.

From the NY Times in 1995:

“There is no historical precedent for this anywhere in the world,” said Judith Shapiro, an economist who specializes in health demographics at the University of London, referring to the drop in Russian male life expectancy from 64 to 57 in the last four years.“

Given there are approximately 100 Million Russian males. A 10%+ reduction in their life expectancy is the equivalent death toll to the type of famines brought on by Stalin’s polices in the 1930s and Mao’s policies in the 1960.

The average American should hope that their advice doesn’t have the same effect on the USA population in the current crisis.

29# Ilya – damn right. Optimistic v pessimistic. Im just not sure Im that optimistic….given I reckon it needs two to three years to play out fully. I suspect latest rally bit of a dead cat bounce but thats what you get for swinging towards the pessimistic side…and I might be wrong of course

The use of the word “toxic” is probably a metaphor arising from the religious world view in the US. The implied story is that the banks are basically good institutions that have carelessly strayed from the path, and now just need to have a few evil entities driven out and all will be well. This kind of thing happened to Jim Bakker so why not Citibank?

This type of old testament thinking pervades the US so probably washes there but elsewhere it might be regarded more as an attempt to euphemise things like systemic failure and culpability.

Joe#32
I think Cringley describes perfectly the “alpha trader” who goes for the jugular setting off a chain of pirana frenzy feeding via their computer workstations – Goldman Sachs. Its called big enough to manipulate the market. Same as the Rockefellers and Vanderbilts way back when. Sharpen the anti trust laws…..once more.

And Bruce – I like the idea of a restrospective tax on the obscene remuneration levels…use it to help fund the bail out. I still think they could have given the $60,000 US to every citizen in the US and liquidity would have improved almost immediately and hey guess what – it would have been a bottom up liquidity injection – straight into loans for small businesses and individuals. Who would have needed the big financial firms, except the big speculators – and we need to clear them out anyway (the bubble blowers).

with regard to the nationalisation option,…while it may well work in theory, it is not a viable alternative in practice. We are firmly in the realm of political economy: nationalisation is an incredibly messy process legally and even less palatable politically.

C’mon Ilya. Who are you trying to kid?

For a start, Joe Sixpack is fuming at Wall Street now and the politics of economic populism have never been better. Most Americans blame GOP-Wall St for the crisis. They are right.

The Congressional rejection of the first “take it or leave it, no questions asked, no come back” bail out plan was unprecedented. In fact it was GOP congressmen who voted against it, no doubt on the urgings of their local businessmen sick of paying for the kleptocratic behaviour of Wall St.

As regards nationalisation, we have both Houses of the Legislature and the Executive on the same side of the aisle. They can make any laws they like. It would take a brave Supreme Court to defy them. (Last time it tried that FDR stacked the bench.)

Nationalisation cuts the Godian financial knot. The Swedes managed it back in the nineties. The Brits seem to be onto it in the late noughties. Its the latest craze:

Everyone’s doing it, do the na-a-a-tion-ation,
come on baby, do the na-a-a-tion-ation with me

[repeat]

As regards the “its all so complex only insiders can figure it out-better let them keep their bonuses-pump up their companies toxic assets” argument, puh-leese. When you “use a thief to catch a thief” you dont put them both back in charge of the bank, with the loot safely stashed or better still topped up by the cops.

I’m sick of hearing this blatant special pleading. There is a fundamental human need for justice, to send the right signal about legtitimacy. And this bail-out sends the wrong signal. No rackets are being wound up. No proceeds of crime are being confiscated. No serious heads are rolling.

For 20 months now, I’ve been reading about how it’s completely beyond the power of human comprehension to untangle mortgage backed securities and figure out about what they are really worth, that no mortal man could possibly understand their complexity, that not enough computing power exists to make sense of them.

I guess I kind of believed that when I heard it back in August 2007, but that was a long time ago.

I suspect that insiders have been working hard on this question for some time, and Tim Geithner’s new “legacy asset” plan has come along at just the right time for them to cash in.

They also probably figure they want to be in on the ground floor when the stock market recovers. I’m betting that will be along time before the labour market.

That last condition saving the biggest slice of the pie for the greediest proves to me that the fix is in, the insiders are connected and theres no point in making any waves. Like I said from the get-go, the bail-out is the last stage of the rip-off, not the first stage of the recovery.

The Russian privatisation process may have been corrupt (including Shleifer jimself apparently) and did produce a small number of oligarchs in the 1990’s.

Whilst not a euphemism on a par with “The war situation has developed not necessarily to Japan’s advantage.” it will do very nicely for the time being.

Eli says:

in 1994, politically there was a serious and clear threat of a return to communism. Quick privatisation of major resources was one of the way of ensuring this becomes impossible. Yelsin’s 1996 re-election was equally corrupt but in the final analysis essential.

I beg to differ. The Communist Party’s legitimacy was founded on its martial prowess. May Day parade celebrated the victory of the Red Army over the Wermacht, not victory of the workers over the bosses. Once Reagan showed the Commies a clean pair of milirary-industrial heels the Party was over.

There was a danger of a right-wing coup. Perhaps something like a Stolypin reaction? Who knows.

All we know is that Yeltsin’s rule was a catastrophe for Russia, enriching the wealthfare state and impoverishing the welfare state. It sent the majority of Russians into penury, the jobless men became alcoholics and the childless women had to sell themselves.

The Chinese CCP performed the reciprocal operation to the Russian CCP with much better results. They put glasnost on hold and embarked on a partial perestroika. Still with a massive state sector of industry to put a floor under the economy. This was excellent risk-management philosophy although not the one cranked out by Mckinsey, Boston Consulting et al.

Eli says:

it eventually did set in place the Putin system of stable and growing economy. The Russian people did not so badly out of it, at least at this point.

Russia appears to be in terminal demographic collapse which Putin is at least trying to do something about this. To his credit, but I fear to little avail. Russia in its traditional form appears doomed.

Eli says:

Summers and Geither are recognising political realities now: they do seem to me to be closer to being realistic than Krugman et al.

No. These guys were part of the original problem. They cannot be part of the solution as they are too compromised. They are ruining America, just like they ruined Russia, whilst cleaning up for themselves.

Like I said back in 2003, we need “some sort of purge of the finance class”.

#Or the shite slave / pronography trade that flourished in newly “privatised” (now thats a joke) Russia. It was a free for all with BNWs being stolen in Germany, driven into Russia and used as bribes to pay the crumbling regime for whatever that was once “state owned” that could be flogged off to criminals. As the economy lurched into crisis, the black economy soared and western europe was washed with the waves of black money feeling an imploding Russia. Russia was not ever an example of a ‘superior’ move to a privatised market economy. It was a collapsed, anarchic mess which yielded up not a small number but a reasonable number of incredibly powerful oligarchs who Putin has managed to keep onside. Good example of orderly processes of a market economy, good example of privatisation?
Dont even think about it. It doesnt get any uglier. Russion crime gangs some of the most powerful in the world.

The advocates of nationalisation implicitly accept that something very different is going to be needed; not permanent public ownership, but a much smaller, more conservative and less profitable financial sector, providing necessary services in the manner of other utility and infrastructure businesses.

Ha, Ha Ha! Picture it now, Obama pitching his plan for a more modest financial system to the head honchos of GS.

“Listen up guys, enough already with the Masters of the Universe. Its time to become…maintenance men of the payments system.”

I can see that suggestion going down like a lead Zeppelin on the Upper East Side.

This whole economic discussion would benefit from being imbedded in some anthropological analysis. Like Tom Wolfe, only in reverse. What the MoU’s are facing here is much worse than a loss of money. They are looking down the barrel of a loss of status.

These guys went to Wall Street because that was the Big League of Alpha Males for the whole wide world. Now we want to convert them to glorified clerks. That represents a very big come down in the world.

Once theyve lost their rank they become just another suit. No wonder they are stalling like crazy and fighting tooth and nail for the retention of their power and privileges. The long slow death of American super-powerdom seems a small price to pay when set against that.

Jack – the fastest way would have been to give the money to citizens and not ask the masters of the universe nor give them a bailout. Their demotion would have happened whether they liked it or not and they would have gone scrabbling for a payments maintenance supervisors position. Dream on Alice…

Jack #40, I see you are accussing of ‘blatant special pleading’: I think I will take as a compliment.

A couple of points. As far as fairness is concerned, let’s be fair to each other’s arguments first: I never said that figuring out and valuing these instruments is too complex or that the current management or insiders need to stay in place, that is entirely your own creation. In fact, in my earlier debate with Alice I explicitly make the point that the instruments are able of being valued. I deal with RMBS professionally and the structures are not that complex.

My point is that nationalisation is exceedingly complex, legally and politically. It would take months. I understand that it is tempting to waive the problems away with a simplistic ‘Joe Sixpack is behind this argument’: the problem is this fails to account for thousands of clauses of legal documents to be put in place and dozens of hysterical Congress members to be cajoled.

From a practical perspectives, I fail to see how Joe Sixpack’s sentiments help here: the existence of the very financial elites that need to be broken up as you say – and I agree – means that some attention will need to paid to the legal technicalities and that the political process would be a mess, given all the lobbying going on.

Now, Geithner’s plan will as I mention above result in a massive payoff to opportunistic hedge funds managers of Bill Gross’s ilk. This is unfortunate but is not a function of the plan but a function of the US political system. Any rejuventation of the system would take years, not something the economy can afford. So, yes, I do think the Administration has the clear-eyed perspective that the plan is not ideal but a better option than any other on offer.

I am sick of hearing the pleading about “money is the blood of the economy” – “its what makes it all happen”…Im hearing it on every news segment by a ten different mouths. Its alreday an overdone cliche which must mean someone is trying to sell the bailout. So thats why we need to give it back to the people who gambled it all away to start with…you can put it back in the banks but what happens when no one wants it and the interest rates are close to zip and the printing has lowered its value…I dont buy the bailout. Its like sloshing buckets of money into a receding tide.

Jack #41, let me disagree with you on this one. (btw my home computer had the relatively anglicizsed Eli entered as my name yesterday, Ilya, Eli, all and the same).

Now, euphemisms or not what I was trying to do in #19 is acknowledge the widespread corruption and the rise of oligarchy in Russia but point out the political realities of the day (note, not in hindsight) as well as the basic fact that for all its faults the Russian economy did do too badly during the 2000′s.

You say that the Soviet system was based on martial prowess. This is baloney. May be true for the 1940′s but certainly not the case for the 1960-1980′s where it was built upon the same things Russia was always built on: centralised state power, pseudo-reliogosity and a degree of economic stability (in this context, natural resources revenue). The military etc. comes in under the two first rubrics. The reasons the Cold War was won by the US has nothing to do with the military but a great deal to do with the economy.

There was a real and very credible danger of a return to communism in the early 1990′s and zero chance of a right-wing coup. There was no nonright wing in Russia at the time. There were hardliners and the military and they were Communist…

As for Yeltsin, your assertion that his rule was a catastrophe for Russia is again pure baloney. What is that based on? Let’s see: (1) elimination of communism from the political landscape; (2) nascent democracy, later rolled back by Putin; (3) for the first time in Russian history, encouragement of free media and other political liberties; (4) introduction of economic institutions and instruments ensuring the growth seen in the subseqeunt decade.

The supposed alcoholism was not a phenomenon introduced during Yeltsin’s presidency, this has a rather longer and richer history than that in Russia.

Ilya #47
Actually it’s not just those financial elites but those social Kenesians that also make up the subject of the article’s excellent expose’ on the oligarchy. To understand what comfortable bedfellows they make when the printing presses are rolling along, you need to ask yourself just who decided public servants should retire on a fixed percentage of their final salary(85% in our case), all at the expense of future taxpayers which was awfully nice of them given that wee problem of demographics looming. Listen to that same mentality howling with CEO golden handshakes now, not least Sir Fred Goodwin, ex Royal Bank of Scotland, off with his 700,000 pounds a year pension and refusing to give it back. To the howls of protest from the social Keynesian set, in a reverse George Bernard Shaw moment he’s virtually saying it’s not his fault they’re just a bunch of cheaper whores and quit their bitching. He know what they are but it’s simply a matter of price dears.

As for Yeltsin, your assertion that his rule was a catastrophe for Russia is again pure baloney. What is that based on? Let’s see: (1) elimination of communism from the political landscape; (2) nascent democracy, later rolled back by Putin; (3) for the first time in Russian history, encouragement of free media and other political liberties; (4) introduction of economic institutions and instruments ensuring the growth seen in the subseqeunt decade.

Dear Eli,

You seem like a nice man. Perhaps you could do better for yourself than act as an intellectual spear-carrier for a bag man from the Russian mob.

Yeltsin was a catastrophe for Russia. By this I do not mean to excuse the catastrophe of Bolshevism. But I do not think that the CIS had to evolve in the “shock therapy” way that Yeltsin directed. Other models of social development were available.

Reviewing your points above:

1. “elimination of communism” Gorbachev removed the Communist party’s monopoly on power. This was the key to disabling totatlitarianism.

2. “nascent democracy,later rolled back by Putin”

One of the big myths about CIS is that Putin has somehow “betrayed” Yeltsin’s marvellous legacy. (This theme is a common one in Russian history as I am sure you would know.) In fact Putin has fulfilled Yeltsin’s legacy, in spades. Yeltsin banned the pluralistically constituted Communist part,y which was undemocratic. Perry Anderson provides a clear-headed unsentimental review of this “revolution betrayed”:

[Putin] realities, however, all have their origins under Yeltsin, whose illegalities were much starker. No act of Putin’s compares with the bombardment of the parliament by tanks, or the fraudulent referendum that ensued, imposing the autocratic constitution under which Russia continues to be ruled.

3. “political liberties” Yeltsin provided freedom of association and expression alright. This extended to the right to set up ones own crime gang and whack your business rivals or partners once you had maneuvered yourself into getting a grip on a vital state industry.

The liberals who supported Yeltsin were, I am afraid, useful idiots for the Russian Mob. Now ruing their original enthusiasm. Here is Anderson:

the liberal intelligentsia…of all domestic groups it was mainly this stratum that helped Yeltsin to power, confident that in doing so it was at last bringing political liberty to Russia.

Hostility – often, in private, verbally extreme hostility – to Putin’s regime is widespread. But of public opposition there is little.

The reason is not only fear, though that exists. It is also the knowledge, which can only be half-repressed, that the liberal intelligentsia is compromised by its own part in bringing to being what it now so dislikes.

4. “economic institutions and instruments ensuring the growth” This bland phrase leaves out the little detail of Yeltsin’s total collapse of public services and basic consumer goods economy. Really this caused premature death of about 10 million people – a slow motion Holocaust.

Most subsequent growth has been as consequence of mineral price rises. Income from this concentrated amongst oligarchs, mobsters and connected officials. Very little seen by ordinary Russians, esp in province. (How come Moscow realty nearly most expensive in world?)

This has caused a massive demoralisation of the populace who are literally self-destructing:

In the new Russia…public healthcare has wasted away, on a share of the budget that is no more than 5 per cent: half that of Lebanon. A sense of the sheer desolation of the demographic scene is given by the plight of women – more protected from the catastrophe than men – in contemporary Russia.

Virtually half of them are single. In the latest survey, out of every 1000 Russian women, 175 have never been married, 180 are widows and 110 are divorcees, living on their own. Such is the solitude of those who, relatively speaking, are the survivors. There are now 15 per cent more women alive in this society than men.

FWIW, I think that the CIS would have been alot better off copying the PRC’s model. Less glasnost and less perestroika. More concern with re-building family social structure and infra-structure.

This is a conservative philosophy at odds with liberalism’s obsession with grandiose institutional reforms and individual liberties (read free-for-all for the sharpest practitioners). It is therefore not one that wins favour with elites. They just want to take money and run.

Why the obsession in so many countries with stripping the public sector?

Traditionally it was the public sector that provided services to the poor, but country after country has had to put up these neo insane attacks on public services, including Australia.

The relentless advance of the zombie privatisers. I would bet its a major factor in advancing inequality in most industrialised nations over the past twenty five to 30 years. The private sector doesnt step in well enough or often enough to provide these services (and it erodes infrastructure and organisation in a ountry – just erodes it rapidly and turns the economy into a dog eat dog world – you cant pay? You cant transport yourself. You cant pay? Your kids dont go to school. You cant pay? your teeth can fall out. You can pay? You wait years for a simple operation.

These services traditionally helped the poor and damn well made them more productive so they add to economic activity instead of starving or committing crimes.

The persistent attacks privatisations (no matter what silly party is in power – where does it come from? Months ago Barry OFarrell voted against privatisation of electricity now he announces he will do it anyway – they all get on the bandwagon – and thats all it is a damn wagon (not the way forward.

This stripping of public services creates a mess they will have to clean up or fix up later and is a terrible burden on the poor and even the middle classes in places like Russia after all those years of a state owned system (to just kill it off and move to an opposite extreme is like making an addict go cold turkey).

Its ridiculous, these IMF prescriptions on privatisations included. Privatisation of teh public sector in every nook and cranny (and replace it with layers of bureacrats on high salaries put in to do the stripping) is a neo liberal obsession bordering on a foolish mania.

I know that this will sound jarring to you but will you stop going to the extremes when writing? You are saying that we are privatising education? Are you insane? Has Sweden, with the most deregulated and open education system privatised it? Has Britain under Thatcher? Or the US under Reagan?

Why are you so incapable of seeing the facts and coming up with an opinion rather than seeing the world as how you would think it is?

Sean # 54
Education in this country (Australia) has been half privatised Sean. The subsidies to private schools are now huge. The admittance of full fee paying students from overseas into our universities has also been large. This is privatisation by half – what do you call that Sean?.
At the turn of the cebtury – we had “the free education act” – ie “no child in this country will deprived of an education because they cannot afford to pay for it.”
Now they all pay. I dont agree and Ill never agree.
You want to split hairs over degrees Sean, as always. Its the direction we have gone down. I dont agree. Education should be free for all students until at least they graduate from a bachelors degree or equivalent. Is that so hard to understand. Its an investment by governments in human capital and a future long term benefits to society.

As for your comment

“Why are you so incapable of seeing the facts and coming up with an opinion rather than seeing the world as how you would think it is?”

Sean#59
The government now no longer owns these assets it privatised and what does it have to show for it? How is government debt looking now after the GFC? Bigger than ever with less income producing assets. You couldnt trust them to run a small business. It was short term insanity to get rid of some of these income producing public assets and mostly we did it courtesy of JH’s blinkered irrational ideologies. Australia, second in the privatisation race by value after the U.K. and look at the mess the U.K. is in.

Personally Alice I don’t get up in the morning and start wondering whether the Govt will provide me with the basics like food, clothing and shelter let alone the ute and petrol to get me to the job. As for the mobile phone to start my day, it seems a lot better than pulling up at a tardis to ring in. Then there’s that small matter of Govt as a proportion of GDP that seems to have slipped your mind and Howards too for that matter, but I’m a fair man and I’ll offer you a swap back to the future of my parent’s day. You can have your pre-Whitlam Govt utilities and Commonwealth bank back if I can have the old university ed system and Social Security system back again. Deal?

I never asked for government meals or government issue clothing and shelter (I havent committed any crimes lately).
But,
Ill take public utilities over the likes of the three amigos anyday (oh and throw in some half way decent public transport as well).
Ive heard there is a bunch of doctors down in Orange waiting desperating for the PPP improvements to Orange Base Hospital to be finished. Trouble it was financed by Babcock and Brown. They might be waiting a while.

Nanks#62
Many private schools actually dont need subsidies at all (and why should they – isnt that government intervention in the private sector and a form of industry protection? They are private because they can raise private money or they should not exist – although the catholic schools are fine – they dont charge students high fees).

Alice, state schools raise private money as well – it really depends on where you see the subsidy going – to the students/families or to the school. Lumping independent schools together into one genre is far too crude. Most independent schools are not ‘elite training grounds for corporate criminals’. They’re just schools with particular value systems that cannot be supported at a more generic state level. Families value those value systems (often ethico-religious) sufficiently to make financial sacrifices. Far from receiving an outrageous boon, there is a financial burden imposed on people who decide they are not happy with the state controlling the education their children receive.
I am not comfortable with the state controlling all education – I don’t trust the state apparatus, and I think we’ve had quite a few years demonstrating that the state should not be the sole purveyor of values and information. remember it is the state schools that are keen to get MacDonald’s and other companies into the education system and influencing children.

What I dont like Nanks is really well off private schools putting their hands out for public subsidies so that they end up with indoor swimming pools, tennis courts and the very best of facilities (by shuffling the students postcodes) along with the healthy donations to the “building fund” and fundraising activities by time rich eastern suburbs or north shore Mums while many other public schools could do with that money to effect basic repairs or install shade structures etc. Fair is fair and that isnt fair. Some private schools simply dont need that money and whether your concern is in how “the state influences education” or otherwise, the reality is that the majority of children attend public schools and many parents would not be able to afford 20 K plus a year for schooling.

I understand your point Alice – however the schools you reference are a small minority – similarly the 20K plus is also a small minority – few private schools charge this much. There is a lot of misinformation about private schooling. Many state schools have better facilities than many private schools (I know this from teachers who work supply across both systems) yet I don’t hear cries of outrage that children are being disadvantaged because their parents hold ethical or religious views that are not supported by the state system even though those parents are taxpayers too.

One: where Yeltsin has a specific political mission with a degree of idealism (i.e. elimination of communism), the entire premise of the Putin regime is utilisation of the Soviet industrial legacy and its conversion into private profits. This was a secondary side effect during the Yeltsin years but since then became the sole purpose, modus operandi and overriding policy objective of the governing elites. There is certainly a degree of continuity, particularly with respect to the personalities involved, but there is a fundamental difference insofar as the destination is concerned. Therefore, to me there is a difference between what happened in 1990′s and what is going on now and I don’t think we should conflate the two as you do in your post.

Two: to claim that Gorbachev defeated communism is dangerously naive. In the context of the 1991-94 period in Russian history, it is plain wrong. The reality is that there was a serious fightback, including for economic reasons, mainly by Soviet industrialist losing control, and there were not immune to using communists and/or nationalists to regain power.

Three: Putin did roll back the democratic legacy of Yeltsin’s years. Let’s see: free media wiped out, regional elections changed to Kremlin appointment of governors, parliament debased with the upper chamber stripped of any material power and the lower chamber turned into a rubber-stamping extension of the executive, elections turned into a farce and freedom of assembly restrained. Now, with the exception of rigging elections as admittedly Yeltsin did do in 1996 (where by the way he should have lost to the communists, see point one again), everything else did exist in the 1990′s.

Finally, no one is arguing things were rosy. If I recall correctly, my original point was with respect to Larry Summers and his predeliction to accepting the realistic political position in preference to the theoretiaclly supperior but unattainable (a al Paul Krugman), both advising Russia in the 90′s or now. This is still my point and the decision made in Russia back then need to be seen in the light of the situation at the time rather than with the benefit of hindsight…

I dont know what city you live in but 20K plus is pretty common for private schools in Sydney ie Sceggs, Knox, Barker, Kings, Shore, Kambal, Sydney Grammar, Newington, Ascot, Ascham, St Lukes etc
The schools that dont need public funding.

Ilya says “The reality is that there was a serious fightback, including for economic reasons, mainly by Soviet industrialist losing control, and there were not immune to using communists and/or nationalists to regain power.says

very interesting – so did Putin capitalise on a nostalgia or yearning for communism (in the same way an ordinary person might yearn for an economic system where they recall they were better off) by a country decimated economically by a too sudden movement to capitalism…as it seems they were?

Ilya # 68 Or was Putin the puppet to other puppet masters (industrialist / oligarchs) instructed to cash in anyway he could politically and how better to aceive that than to offer the people an old comfortable system, when the new system is working so well?

There are over 900 non-govt schools in NSW and most non-govt schools in NSW are not in the elite highest (> $20k) charging group. Let alone across Australia. It is somewhat misleading to claim that >20k fees are common as relatively few schools charge that much and I believe only in NSW and Vic – ie in a minority of states

Many of the elite schools in those states are charging more than $20,000 a year in Year 12.”

Notwithstanding how many are charging >10,000 – a lot of schools. As I said before I have no objectionto cathlic schools (they dont charge a lot) but why should schools who charge 10 to 20K in fees get government susbisies?

Its not fair. &0 percent of all children still go to public schools – any funding should be allocated on this basis and Im not in favour of subsidising schools who simply dont need it when there is a backlog of maintenance works in public schools that hasnt been done for years.

77#
nanks – most faith based schools are fine and catholic schools I gave as a case in point which are fine…but as for the brethren…so fond of JH with their tiny numbers opening up schools when they dont have the numbers just to get a subsidy…it has been happening Nanks (obscure faith based schools wanting a handout when they have barely any students – what next the outer Mongolian school for the worship of the soul of Gengis Khan- all three students of the director???)..as usual a private rort of a public subsidy for which I dont my taxes redirected.

This sort of thing has been happening and today I notice some of the most expensive private schools applied for new gyms, halls and playing fields and got large subsidies (more than schools that need a single gym).